Bidding War for Cheese Heralds 13% Warrnambool Bump

International dairy groups with an eye on Asia compete for Australian cheese plant.

Angus Whitley and David Stringer

Nov. 1 -- A three-way bidding war for Australian cheese that is already leading to one of Asia’s most expensive food deals is poised to become even pricier.

Saputo Inc. of Montreal offered $425 million for Warrnambool Cheese & Butter Factory Co. last month, beating two bidders with a record premium for a peer in Asia, according to data compiled by Bloomberg.

After Japan’s Kirin Holdings Co. this week bought about 10 percent of Warrnambool for more than Saputo’s proposed takeover price, bids may rise even higher, said RBS Morgans Ltd.

"There will be more corporate moves on this," Graeme Browning, Sydney-based head of Australian transactions at EY, the consulting firm formerly known as Ernst & Young, said in a phone interview. "This is a very strategic asset to a whole range of buyers."

The 125-year-old Warrnambool, based near the town in Victoria that bears its name, said that exports accounted for 46 percent of sales last fiscal year. Its brands include Sungold milk.

Bidding Contest

The bidding for Warrnambool started when Bega, the company’s biggest investor with an 18 percent stake, made a stock-and-cash proposal that was valued at A$5.78 a share when it was announced Sept. 12. The next month, Saputo offered A$7 a share and Murray Goulburn, which owns 17 percent of Warrnambool, bid A$7.50. Then Saputo, Canada’s largest dairy processor, agreed to pay A$8 on Oct. 25.

This week, Kirin’s food and drinks unit in Australia, Lion, said it acquired 9.99 percent of Warrnambool. According to exchange filings, it bought the shares on Oct. 29, when they were trading above Saputo’s latest bid.

Warrnambool has agreements to supply as much as 20,000 metric tons of cheddar each year for Lion’s Coon and Cracker Barrel cheese brands, according to an April presentation. The purchase of a stake in Warrnambool was a "strengthening of this relationship," Sydney-based Lion said in a statement.

"Kirin has bought itself an ability to influence the outcome," said Browning, head of Oceania Transactions Advisory at EY. "It almost ups the stakes for the previous three bidders. They each now have to deal with Kirin."

Deal Security

Kirin is concerned its supply deal with Warrnambool will be at risk under Saputo’s ownership, said Shannon Rivkin, Sydney- based director at Rivkin Securities. Lion’s stake makes it tougher for Saputo, which has stipulated it must own more than 50 percent of Warrnambool to proceed with its bid, he said.

"It’s a very expensive seat at the table," Rivkin said in a phone interview. "Saputo’s position is not as good."

Warrnambool closed at A$8.27 in Sydney trading. That reflected some expectations of a higher bid, Rivkin said.

A deal with Warrnambool would result in "substantial" cost savings for Bega and closely held Murray Goulburn, and they could both potentially offer more, said Belinda Moore, an analyst at RBS Morgans in Brisbane.

For Saputo, the target is a means to tap China’s dairy boom and that’s tough to value, she said.
"Will the next bid be at A$8.50? That’s a high possibility," Moore said in a phone interview. "If that’s either Bega or Murray Goulburn, does Saputo then come in and trounce them with A$9? That could be likely."

Still Committed

Bega, based in the New South Wales town of the same name, won approval yesterday from Australia’s competition regulator to proceed with its bid. Bega’s directors will meet next week to consider raising the offer, Chairman Barry Irvin said in an interview yesterday. Bids are already "pretty big," he said.

Bega shares today jumped 9.5 percent to A$4.83 after New Zealand’s Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said today it bought a 6 percent stake in Bega. The gain swelled the value of Bega’s cash-and-stock offer to A$7.80 for each Warrnambool share.

Fonterra plans to participate in any consolidation of Australia’s dairy industry, it said in a statement today.

Murray Goulburn spokeswoman Lynn Semjaniv declined to say whether the company planned to raise its bid. The producer "remains committed" to buying Warrnambool, the Melbourne-based company said in an e-mailed statement yesterday.

Saputo’s current bid is "compelling," Chief Executive Officer Lino Saputo said in an e-mailed statement yesterday. "We also have the financial capacity to deliver on this," he said.

Too High?

Warrnambool expects the price of exported milk powder, butter and cheese to surge in coming months, and analysts project the company’s profit will more than double in the 12 months ending June 2014.

China is setting new records for milk-powder imports, Warrnambool said last month, while across Southeast Asia, local dairy production can’t keep up with demand, agricultural researcher Rabobank said in a July report.

Even so, it’s unclear if any bidder can make a return buying Warrnambool at the current price, said Evan Lucas, a Melbourne-based strategist at IG Markets Ltd.

"I’d be wondering whether I’d gone past the point where it’s actually viable," Lucas said in a phone interview. "Does Warrnambool have the asset quality to back up that kind of price?"
Warrnambool last year posted its lowest profit since 2009 and its stock fetched as little as A$3.89 in June.

Motivated Buyers

Saputo’s A$8-a-share offer, approved by Warrnambool’s directors, was 80 percent higher than the stock’s average price in the 20 days before bidding started, according to data compiled by Bloomberg. That’s a record premium for a takeover of a food company in Asia with a market value of more than $200 million, the data show.

Rivkin said all bidders have a motive to make higher offers. Saputo, with a market value more than 14 times larger than Bega’s, can afford to overpay for Warrnambool to deliver its Asian strategy, Rivkin said. Bega and Murray Goulburn risk becoming targets themselves if Saputo buys Warrnambool, he said.

"The bidding war is almost a challenge of how much is it worth to me versus how much can I afford to lose it," said Norm Repacholi, commercial research and analysis manager at Dairy Australia, which raises levies from farmers to fund industry projects. "Each of the different players has a unique competitive imperative."

Among suitors with differing goals, it’s not clear how high the bids may go, said Moore at RBS Morgans.

"This could potentially play on for months and the offers could continue to rise," she said. "Watch this space."